Turkey: Ankara Engaged in Energy Balancing Act

On matters of energy security, Turkey is finding itself caught between Iran and the United States, two countries Ankara describes as allies.

The tension is especially evident when it comes to oil. Ankara seems willing to go along with US efforts to increase economic pressure on Iran, evidenced by Turkish officials’ recent decision to slash Iranian imports by 20 percent. Natural gas is another matter, however. The cost, not US pressure, is what seems to be driving Turkey’s ongoing gas dispute with Tehran.

Turkey currently obtains 24.3 percent of its natural gas supplies from Iran, its largest single supplier after Russia. When a 25-year supply agreement between the two countries was signed in 1996, Iran, a neighboring state with 29.61 trillion cubic meters of proven natural gas reserves, seemed an ideal export partner for Turkey. Ankara even agreed to a “take or pay” condition that required it to pay Iran for a predetermined amount of gas every year, even if Turkey did not use it.

But now the price of Iranian gas at roughly $500 per 1,000 cubic meters (tcm), or about $100 more per tcm than the price of Russian gas, according to figures published by local media outlets. Turkish officials, not surprisingly, are itching to renegotiate the terms of the Iranian import deal.

While Russia has agreed to lower the price of gas it exports to Turkey, Iran, which is increasingly squeezed by sanctions, doesn’t want to revise its sweet 1996 deal. “[The gas dispute] is fundamentally a problem of the contract,” said Sinan Ulgen, chairperson of the Istanbul-based Center for Economics and Foreign Policy Studies. “It’s about a long-term supply price formula in a long-term contract that does not reflect current gas prices.”

Energy Ministry officials were not available to discuss Turkey’s Iranian gas policy.

For now, Turkey seems to lack leverage to compel Iran to budge on the pricing issue, as there’s no way at the moment for Ankara to replace its Iranian imports. Gas from Azerbaijan’s Shah Deniz II fields has the potential to be a suitable substitute, but the energy from that Caspian Basin source isn’t expected to start flowing for another two-to-three years, and a Turkish-Azerbaijani pipeline deal hasn’t yet been finalized. Meanwhile, increasing imports from Russia or Central Asia remains a “hypothetical” discussion, noted Mitat Celikpala, an energy and security specialist at Istanbul’s Kadir Haş University.

Claiming that it does not receive an adequate amount of Iranian gas, Turkey this January took Iran to the International Court of Arbitration over the deal. Unless Iran agrees to negotiate soon, Turkey could open another court case over the matter, analysts say.

But the issue is deeper than a pricing dispute between neighbors. Turkey “is using more than 50 or 60 percent [of its] natural gas to produce electricity,” said Celikpala. Given a weakening Turkish lira and worries about an overheating economy, Turkish officials want to decrease energy imports.

On March 31, Turkish Energy Minister Taner Yıldız announced a 9.3-percent increase in electricity prices for residential users and an 8.7-percent increase for industrial customers. Natural gas prices were raised a staggering 18.7 percent. “The government is trying to discourage the consumption of all the oil and energy,” Celikpala said. “This is the basic aim.”

The increased prices will affect the Turkish economy, which is already expected to slow after expanding at an 8.5 percent rate in 2011, according to official figures. Yet Turkish citizens must rethink how they consume energy as regional concerns over tightening sanctions against Iran come into play.

Intended to force Iran to be more open about its nuclear program, tightening sanctions threaten to cut access by the second half of 2012 to American financial institutions for Turkish banks that do business with blacklisted Iranian entities.

While Turkey in the past has insisted that it only recognizes United Nations sanctions against Iran, its current energy policy appears to take US interests increasingly into account. On March 30, just days after US Ambassador to Turkey Francis J. Ricciardone expressed “hope” that Turkey would reduce its Iranian oil imports, the Turkish Petroleum Refineries Corporation, Turkey’s only oil refiner, slashed its purchases of Iranian oil by 20 percent. Turkish officials said that the Iranian oil would be replaced with supplies from Libya and the Persian Gulf.

In the past, Turkey has managed to sidestep US sanctions on its gas agreement with Iran, but no official exemption has been obtained from the latest sanctions.

Turkey’s reduction of Iranian oil supplies and effort to renegotiate the price of Iranian gas could be its saving grace for such an exemption, believes Ulgen, the Center for Economics and Foreign Policy Studies chair. "The United States has already exempted a number of countries from these sanctions,” he said. “To the best of my knowledge, their hope … is for the United States to exempt additional countries and Turkey may be one of those."